Michael Mauboussin of Legg Mason authored an interesting perspective on the “lead steer”. Read PDF report.
Blog
Michael Mauboussin: Invisible Lead Steer
Emotional Intelligence for Trend Following
Good Advice
I caught a brief story today about ‘exits’. The following excerpt is right from the trend following play book:
“It’s a common enough saying that people use in various situations in everyday life. But when you’re a stock investor, the phrase “cut your losses” takes on a special meaning. Investors are tempted to hang onto a stock that’s begun to tank. It’s easy to think, “Well, this stock can’t go any lower,” or “It’s a good company; the stock will come back.” But you don’t get ahead in the market by hoping and wishing and guessing. A better plan is to apply a strong set of rules that have worked. While your stock-buying rules are your offense, your sell rules are your defense. It’s inevitable that you’ll make mistakes or you’ll buy a stock at exactly the right point, but the breakout fizzles. You want a Plan B ready for those situations. Here’s what that Plan B looks like: Say you bought a stock at the proper entry point. But the breakout goes awry, and the stock moves lower. Keep an eye on it. If it falls 7% to 8% below your buy point, sell it.”
Investor’s Business Daily
Katharine Stalter
Skill v. Opportunity (& Luck)
Can a great trader have great skill and no opportunity to make money? Can a bad trader have no skill and tons of opportunity to make money? The answer is yes to both questions. Luck is at play in the short-term for most traders. There will always be “some guy” with a great one year return. The sustained edge appears only over time.
What’s the point? What happens when the bad trader with no skill finally finds himself with no opportunity? Think about it.
Jon Sundt of Altegris is to be thanked for the root of this analogy. He made it at a recent symposium I attended.
Trend Following Traders Trade Currencies
Representing Uncertainty
In doing some research on the concept of ‘uncertainty’, this paragraph caught my eye:
“If there is one thing that defines and limits our efforts to better understand extreme and rare events it is uncertainty. Uncertainty arises from both an imperfect understanding of the rare events and processes we wish to study (e.g., terrorism, natural hazards), and the imperfect, out-of-date, and incomplete data we must work with in order to try and understand these events and processes.”
Mark Harrower
University of Wisconsin-Madison
Along these lines consider the following white paper “Confronting Uncertainty: Intelligent Risk Management with Futures” from trader Robert M. Tamiso: View PDF.
Technical Trading
Food for thought:
“Technical trading is not glamorous. It will rarely tell that you bought at the lows and sold at the highs. But trading should be a business, and a systematic program is a plan to profit over time, rather then from a single trade. High expectations are essential to success, but unrealistic ones just waste time. Computers do not tell the user how to make profits in the market; they can only verify our own ideas. We consider using a computer to develop trading programs to be a sensible, conservative approach.”
Cognitrend GMBH